Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by people, and increasingly businesses, running computers all around the world.
Acquiring Bitcoins
Several marketplaces called “bitcoin exchanges” allow people to buy or sell bitcoins using different currencies. Mt. Gox is the largest bitcoin exchange. People can send bitcoins to each other using mobile apps or their computers. It’s similar to sending cash digitally.
People compete to “mine” bitcoins using computers to solve complex math puzzles. This is how bitcoins are created. Currently, a winner is rewarded with 25 bitcoins roughly every 10 minutes.
What makes it different from normal currencies?
Bitcoin can be used to buy things electronically. In that sense, it’s like conventional dollars, euros, or yen, which are also traded digitally. However, bitcoin’s most important characteristic, and the thing that makes it different to conventional money, is that it is decentralized. No single institution controls the bitcoin network. This puts some people at ease, because it means that a large bank can’t control their money.
How does Bitcoin work?
From a user perspective, Bitcoin is nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and enables a user to send and receive bitcoins.
Behind the scenes, the Bitcoin network is sharing a massive public ledger called the “block chain”. This ledger contains every transaction ever processed which enables a user’s computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses therefore allowing all users to have full control over sending bitcoins.
Thus, there is no fraud, no chargebacks and no identifying information that could be compromised resulting in identity theft.
What is bitcoin based on?
Conventional currency has been based on gold or silver. Theoretically, you knew that if you handed over a dollar at the bank, you could get some gold back (although this didn’t actually work in practice). But bitcoin isn’t based on gold; it’s based on mathematics.
Around the world, people are using software programs that follow a mathematical formula to produce bitcoins. The mathematical formula is freely available, so that anyone can check it. The software is also open source, meaning that anyone can look at it to make sure that it does what it is supposed to.
What are its characteristics?
Bitcoin has several important features that set it apart from government-backed currencies.
- It’s decentralized
The bitcoin network isn’t controlled by one central authority. Every machine that mines bitcoin and processes transactions makes up a part of the network, and the machines work together. That means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown – or simply decide to take people’s bitcoins away from them. - It’s easy to set up
Conventional banks make you jump through hoops simply to open a bank account. However, you can set up a bitcoin address in seconds, no questions asked, and with no fees payable. - It’s anonymous
Users can hold multiple bitcoin addresses, and they aren’t linked to names, addresses, or other personally identifying information. - It’s completely transparent
Bitcoin stores details of every single transaction that ever happened in the network in a huge version of a general ledger, called the blockchain. If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address. They just don’t know that it’s yours. - Transaction fees are miniscule
Your bank may charge you a £10 fee for international transfers. Bitcoin doesn’t. - It’s fast
You can send money anywhere and it will arrive minutes later, as soon as the bitcoin network processes the payment. - It’s non-repudiable
When your bitcoins are sent, there’s no getting them back, unless the recipient returns them to you. They’re gone forever.